Fitch Ratings Affirms AGL and Nicor On Merger Approval

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings of AGL Resources, Inc. (AGL), AGL Capital Corp. (AGL Capital), Atlanta Gas Light Company (AGLC), Nicor, Inc. (Nicor) and Northern Illinois Gas Company (d/b/a Nicor Gas) following Illinois Commerce Commission (ICC) approval of the previously announced acquisition of Nicor by AGL. The Rating Outlook is Stable. A full list of affected ratings in included below.

Fitch anticipates that the final order will be largely consistent with the terms agreed to with the staff and in the draft Administrative Law Judge ruling. The ratings affirmations and Stable Outlook reflect the low business risk profile of the combined entity and the expectation that consolidated credit measures will be consistent with current ratings over the medium term. Upon closing of the transaction Fitch would also anticipate withdrawing the ratings of Nicor, Inc. as that entity will effectively cease to exist.

KEY RATING DRIVERS

AGL and AGL Capital

Strong Utility Operations: The low-risk profile of AGL's diverse utility operations remains its primary rating consideration. With the completion of this transaction, AGL will own gas distribution utilities in seven states, all of which have full recovery of gas commodity costs through adjustment mechanisms. AGLC, currently AGL's largest subsidiary, benefits from a volume-insensitive straight fixed-variable rate design under which the utility is not affected by weather fluctuations and/or customer usage. In addition, Virginia Natural Gas Co. (VNG) and Elizabethtown Gas Co. (EGC) both have weather normalization provisions and partial revenue decoupling. While Nicor Gas' rates are not fully decoupled, its most recent rate orders authorized the recovery of 80% of fixed costs in the fixed customer charge. Fitch expects that AGL's core natural gas utility operations will continue to represent the vast majority of consolidated earnings and cash flow at approximately 80% of EBITDA.

Consolidated Financial Profile Pressured: With the addition of acquisition related debt, consolidated credit metrics are expected to be weak for the rating category. At Sept. 30, 2011, AGL's consolidated funds from operations (FFO) and EBITDA interest coverage was 5.23 times (x) and 5.22x, respectively. For the same period, debt to operating EBITDA was 4.32x while FFO to debt was 18.8%. Fitch projects that with the addition of Nicor, leverage will remain over 4x while FFO to debt will initially be less than 17%. Long term ratings stability will be dependent on reduction in leverage through successful integration and realization of operating synergies. As AGL's capital spending plans moderate, external financing needs are expected to be limited while liquidity remains solid with the recent renewal and upsizing of its $1.3 billion bank credit facility.

Manageable Unregulated Exposure: AGL's primary unregulated operations include Sequent Energy, a wholesale energy marketing business; SouthStar Energy Services, a competitive gas retailer; and Pivotal Energy, a high deliverability salt dome storage business. Results from both Sequent and Pivotal have been challenged recently by low volatility and the collapse of basis differentials in the natural gas markets. SouthStar, on the other hand, has more utility-like characteristics in its primary Georgia retail market as it does not serve as the provider of last resort resulting in relatively low bad debt expense. However, as this business grows in other markets, Fitch will continue to monitor changes in the risk profile.

With the acquisition of Nicor, AGL will add some incremental unregulated operations including Tropical Shipping, a transporter of containerized freight in the Bahamas and Caribbean. Nicor's wholesale and retail energy services businesses as well as it gas storage development activities are expected to be integrated into AGL's existing operations. Overall, while results from the unregulated businesses are more volatile than the traditional utility operations, the exposure is somewhat limited, given the relative contribution to consolidated cash flows.

Atlanta Gas Light Company

Parent Ratings Linkage: AGLC's ratings reflect its strong individual credit profile, while also considering the linkage to its parent, AGL on whom it relies for access to capital and liquidity. AGLC has approximately $182 million of medium-term notes outstanding which are being refinanced at the parent level over time. Affiliated companies, including AGLC, participate in a corporate money pool arrangement at AGL for short term borrowing needs. Capital at the utility is managed to be consistent with regulatory targets, although the Georgia regulatory framework does not limit AGLC's ability to upstream dividends to AGL.

Strong Utility Operations: AGLC has historically benefited from favorable service territory demographics. However, overall customer growth for 2011 remains flat due to a weak residential housing market and general economic conditions. As a pure energy delivery company, AGLC operates under volume-insensitive straight fixed-variable rates. Accordingly, changes in customer usage patterns due to weather and improvements in equipment efficiencies or other business conditions have minimal financial effect. The utility also benefits from a constructive regulatory environment which includes riders for recovery of infrastructure investments.

Manageable Customer Concentration: While AGLC has customer concentration risk, billing only nine marketers, financial exposure is limited since the company is able to obtain security support in an amount equal to a minimum of two times a marketer's highest monthly bill. In addition, AGLC bills its delivery service to marketers in advance rather than arrears.

Nicor and Nicor Gas

Solid Utility Operations: Nicor's ratings reflect the low business risk of its core regulated gas distribution business, while also considering the risks associated with its unregulated businesses. Nicor Gas' utility operations are supported by a large, mostly residential customer base, diverse source of gas supply and 150 Bcf of gas storage, a monthly purchased gas adjustment (PGA) mechanism, and manageable capital spending and external funding requirements. While the gas utility's rates are not fully decoupled, its most recent rate orders authorized the recovery of 80% of fixed costs in the fixed customer charge, up from 60% in previous rates.

Independent Market Access Post Merger: Unlike AGLC, Nicor Gas is expected to continue to maintain capital market access independent of AGL, with its own commercial paper program and liquidity facilities. Nicor Gas' existing revolving credit facilities are expected to be replaced with a $700 million bank facility following the closing. Debt maturities are very manageable with $50 million maturing in 2016.

Strong Financial Profile: Nicor Gas' cash flows continue to benefit from the utility's recent base rate increase and Fitch expects its financial profile to remain consistent with the current ratings. EBITDA to interest and FFO coverage are projected to remain over 10x. Leverage is also expected to remain strong for the rating category with debt to EBITDA of 2.5x over the forecast period. Given capital expenditure plans, the utility is expected to be modestly free cash flow positive.

Utility PBR Exposure Remains: Nicor Gas continues to be exposed to potential liability payments associated with the Performance Based Rate (PBR) case, which remains under ICC review. Fitch notes that Nicor Gas could make a significant one-time payment based on current recommendations of the various intervenors. Barring an outcome at the higher end of the potential liability range, ratings could be maintained.

Fitch affirms the following ratings, with a Stable Outlook:

AGL Resources Inc.

--Issuer Default Rating (IDR) at 'A-'.

AGL Capital Corp. (guaranteed by AGL)

--IDR at 'A-';

--Senior unsecured notes at 'A-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Atlanta Gas Light Co.

--IDR at 'A-';

--Senior unsecured medium-term notes at 'A'.

Nicor Inc.

--IDR at 'A';

--Senior unsecured notes at 'A';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

Nicor Gas

--IDR at 'A';

--Senior unsecured notes at 'A+';

--First mortgage bonds at 'AA-';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Crtieria and Related Research:

--'Corporate Rating Methodology', Aug. 12, 2011;

--'Recovery Ratings and Notching Criteria for the Utilities Sector', Aug. 12, 2011;

--'Parent and Subsidiary Rating Linkage', Aug. 12, 2011.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648449

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210

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